Monday, October 3, 2016

It's True! The system is rigged.

I guess the system really is rigged.  At least for those in the real estate business.


James R said...

I'm not sure that "The system is rigged." is the best description of depreciation. Everyone knows about depreciation. It's been around for ever (figuratively speaking). It's one reason people increase the housing stock by building apartment buildings. It's one reason people buy apartment buildings and sell them after a period of time so the new owners can magically take depreciation on the building all over again. It's one reason living in an apartment is much cheaper than owning a house. It's one reason poorer people can afford a place to live. Like all laws, tax or not, it can be debated.

When I think of "The system is rigged.", I think of people of color being redlined for an apartment or a housing loan. I think of wealthy buying government officials favors. I think of the old boy network or the glass ceiling. I think of societal inequities. You may be right that current society believes depreciation is bad and that it stays around only because of real estate lobbying efforts. That is where I believe the system is rigged—wealthy lobbyists getting more than their share attention from government.

Big Myk said...

I think, ultimately, we are saying the same thing, but let me make a few points. Sure, we all know about depreciation. But, for most property used in business -- machinery, vehicles, furniture, and equipment -- the depreciation deduction at least tries to approximate the actual decay in value that occurs in wear and tear, and represents a genuine loss to the taxpayer. In the real estate business, however, your asset is often increasing in value, so the deduction for depreciation is just a giveaway.

And, if this represents some federal policy to encourage the construction of apartment buildings, it's not very well targeted, since it gives the same generous benefit to developers buying or constructing hotels, resorts, office buildings, convention centers or shopping malls. Why should the taxpayer subsidize these sorts of projects? If you really wanted to increase housing stock or reduce rental rates, why not apply the magical deduction to only in the building of rental apartments? Or, provide housing subsidies to people who need them? I have difficulty seeing the social value in giving huge tax breaks to developers for building casinos.

But, I agree with you, the way the game gets rigged is that people with money get to influence things and the rest of us don't. Lobbyist Jack Abramoff's extensive influence in the younger Bush adminsitration is a case in point. Clearly, we need to work on electing more virtuous representatives with backbone who won't yield to temptation.

In any event, I simply pointed out that one -- I thought -- blatant example of this was the tax breaks given the real estate industry. To see how the average effective tax rate in the real estate industry compares to that of other industries: How Donald Trump and other real-estate developers pay almost nothing in taxes.

A small additional point: I disagree with you that redlining is an example of the system being rigged, if by rigged, we mean that the outcome is fixed. Redlining is no doubt an unfair thing, but it's also illegal. Sue and I were initially denied a loan for our first house, which in the course of discussions the lender admitted was due to its redlining policy (erroneously thinking that he was exempt from the law). But, calls to the Federal Home Loan Bank Board and the counsel to the lender got a reversal of the decision within the day and we got our mortgage.

Big Myk said...

I just happened to run across this. James Russell Lowell, in his endorsement of Lincoln in 1860, gave us some sage advice, which I think has some value in our discussion of politicians who engage in rigging th system in favor of their financiers:

In a society like ours, where every man may transmute his private thought into history and destiny by dropping it into the ballot-box, a peculiar responsibility rests upon the individual … For, though during its term of office the government be practically as independent of the popular will as that of Russia, yet every fourth year the people are called upon to pronounce upon the conduct of their affairs. Theoretically, at least, to give democracy any standing-ground for an argument with despotism or oligarchy, a majority of the men composing it should be statesmen and thinkers.

James R said...

You're right, casinos are very different things than apartment buildings. Also, I don't know how you run into these things, but I like the Lowell quote. Now, we shall see once again if we are a nation of statesmen and thinkers.